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April 10, 2015

America vs. Aisa: Which Infrastructure Is a Better Investment Bet?

By Michael Likosky, 32 Advisors
Few would dispute that America faces an infrastructure crisis as cities, states and the nation remain cash-strapped. Just look at the pending transportation bill, which would vastly underfund our needs, to see how low a priority infrastructure is in Washington.  

Investors see opportunities to finance the difference between what we need and what we can afford to pay for.

But investors see opportunities to finance the difference between what we need and what we can afford to pay by, say, upgrading a port and being repaid by fees from shippers.

This is distinct from traditionally financed projects in that the investor can only recoup costs, and profit, as long as the port performs well. And the investor would only pay contractors when the job is done to spec. The contractor would have to cover any cost overruns themselves, rather than going back to the government for pay to complete a project. Ultimately, the private investor, not taxpayers, would bear the risk of poor performance or unexpected delays.

America's infrastructure needs vary greatly from project to project. Different investors have grown up to finance distinct needs. Private investment can present a genuine opportunity for governments and communities as long as both sides are attuned to the needs and requirements of the other and the right match is made.

Some want only mature infrastructure assets that they can fix up and sell. Some pursue high risk/high return projects in which they will get paid only if their projections are realized and, if not, the government gets a cost-free project. A pension fund, for instance, might be willing to build a project from scratch even if they don’t realize their return for a number of years. Other investors may agree to invest in infrastructure unable to be supported from user fees such as structurally deficient bridges, in exchange for regular payments from government over a period of time.

Solving our infrastructure crisis can be as much about politics as about money, though. Labor groups might be wary of privately financed projects that pay lower wages than the ones several generations of workers have fought to gain. Rural communities might want water, but not if investors demand a high rate of return.

But is being locked in a fight with no winner worth being passed over for investment that supports our economic competitiveness, growth and basic health? We do not simply need more money in the system, but more targeted investment opportunities where the key stakeholders, including financiers, are also willing to think innovatively and work through challenges that often derail projects.

Note: This article first appeared at NY Times on April 8 
About the Author: Michael Likosky is the co-Head of Infrastructure at 32 Advisors. He has over fifteen years of experience providing advice to many of our nation's leaders and acting as an expert in infrastructure and public and private partnerships. 

The views and opinions expressed herein are the author's own, and do not necessarily reflect those of EconMatters.

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